Brewing a Coffee Strategy

Competition is percolating for gourmet sales, forcing c-store owners to elevate their offerings.

By John Lofstock, Associate Editor.

When people get more, they expect more—and that, as much as anything, helps to explain the challenge facing convenience store operators who emphasize coffee.

Coffee quality at the retail level has improved to a point where what used to be considered premium is now thought of as standard. Thus, operators hoping to impress shoppers with an upscale coffee product need to take their game to a new level.

“The bar has been raised to new heights,” said Joe DeRupo, director of communications for the National Coffee Association (NCA) in New York City. “We now realize that with all the gourmet coffees available in supermarkets and coffee houses, consumers are starting to regard upscale brews as the traditional offering. It’s become engrained in the American coffee consumer’s psyche.”

But Americans still want that premium coffee experience. NCA’s annual study, which has become the standard on tracking coffee consumption in the U.S. for the past 50 years, found that 40% of the cups of coffee sold in America are gourmet.

“Just about a quarter of Americans (24%) drink a gourmet coffee beverage every day,” DeRupo said. The study also shows that just 3% of Americans aged 18 or older reported they drink gourmet coffee in convenience stores or service stations.

Thus a major challenge for c-stores serving coffee lies in overcoming the same lingering stigma that has plagued foodservice programs in general: that many Americans don’t associate quality food and beverages with retailers that have gas pumps.

Tracking the Competition
The bar is being raised by many of the fast food restaurants with which c-stores compete. As DeRupo pointed out, “I know for a fact that in fast food restaurants, which are thought of as analogous to convenience stores, they are paying attention more than ever before to the quality of the coffee. Just look at what they call McCafé at McDonald’s. That’s a major change from where they were just a few years ago.”

The same is true of Burger King, which late last year began offering Starbucks Corp.’s Seattle’s Best Coffee. The No. 2 burger chain also offers iced varieties that come with a choice of plain, vanilla or mocha flavors and whipped toppings.

In fact, Seattle’s Best is indicative of the shifting levels of gourmet with which consumers are trying to acclimate themselves. In January, the brand inaugurated a major marketing campaign under the tag line Anywhere Coffee is Needed, which focuses on bringing coffee to people in unusual circumstances. The brand is positioning itself as the fun coffee as opposed to Starbucks’ premium brew.

“With Seattle’s Best, there wasn’t a true brand position, there wasn’t emotional positioning,” said Michelle Gass, Seattle’s Best president. “Starbucks is premium, and Seattle’s Best is more of a mass premium. Our new ‘Levels’ coffee system makes it really easy to position Seattle’s Best as a mass premium brand.”

NACS agreed with DeRupo, noting in its 2010 State of the Industry report that quick-service restaurants “are engaged in fierce competition with convenience stores to capture consumer spending in the hot dispensed beverages category. Coffee is the hot beverage of choice among convenience customers and the No. 1 subcategory of hot dispensed beverages, generating 77.6% of category sales.”

Cappuccino/specialty coffee was No. 2 within the category, with 13.38% of category sales, a slight increase from last year. Hot dispensed beverages gross margins softened in 2010. The category was able to generate a gross margin of 55.3% and accounted for 8.5% of total inside gross margin, making it the number-three category in terms of total in-store gross margin contribution.

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